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|Subject: Re: Lump Sum vs Pension Annuity||Date: 3/22/2011 8:25 PM|
|Author: BruceCM||Number: 68688 of 83178|
I did 20 years of hard time with my previous employer.
This wasn't at Shawshank, was it?
They froze the pension plan in 2006, nevertheless, I am still eligible for a pension based on all my service up to that point.
I am eligible to begin receiving a reduced monthly amount at age 55, or wait and receive the full monthly benefit at age 65.
There are two way companies may 'freeze' a plan. A "warm freeze" that allows you to keep accruing benefits even though the plan isn't enrolling any new employees. Then there's a "hard freeze" where the plan stays in place, but you do not accrue any more benefits. I'll assume from your discription, that it is the former.
Additionally, there is an option to receive a partial lump sum in lieu of monthly payments.
I have not yet contacted the company to look into the lump sum option.
What are the calculations and considerations given to taking a lump sum vs. monthly benefit?
The 'lump sum' is what is called the "Present Value" of your future benefits. This is comperable to the 'lump sum' you'd pay an insurance company to provide you with a life annuity. In fact, this is exactly what some employers do with the accrued 'lump sum'. If you'd like, I can explain the calculation used to get to the Present Value, but it won't change what you'll be offered.
You don't mention it, but a significant factor in determining the lump sum is if the plan will increase each year with inflation. This is rare with private employers, but does often occur with government employers, and may significantly increase the present value.
Assuming there is not an annual inflation adjuster, you will need to look at the lump sum value your employer plan would provide you and then find the best life annuity available from an insurer that could annuitize the lump sum amount you'd roll over into your IRA.
Most private employer plans are insured by the PBGC under ERISA although some employer plans are not 'insured' this way (multi-employer plans, plans of service employers with fewer than 25 employees, family owner employers, and a few others) and will be protected from default by the PBGC, as has already been mentioned. If the employer went bankrupt, the plan would be taken over by the PBGC, who, like the FDIC with failed banks, will take over operations of your life annuity. Most or all of your benefit would continue. With a private insurance company, the annuity in your IRA could be lost if the insurer went into default, although most state's "Guaranty Funds" will protect the annuity Present Value up to certain maximums...usually minimum $100,000 up to unlimited. However, private insurer default is rare.
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